Daniel Loeb's Best Picks for 2011

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.

Third Point's flagship fund returned 41.7% in 2010. NXP Semiconductors ( NXPI) returned 54% between Sept. 30 and Dec. 9, when Dan Loeb penned his third quarter investor letter. Daniel Loeb was extremely bullish about NXP Semiconductors in his letter. This is what he said:

"In August, we participated in the IPO of NXP Semiconductors NV, a leading semiconductor manufacturer emerging from a 2006 LBO led by KKR, Silver Lake, Bain and Apax. We had successfully participated in the NXP story via its distressed debt in late 2009, and were prepared for the IPO, which came at a very attractive valuation of roughly 5.5x estimated 2011 EPS.

" The company is in the final stages of completing a substantial operational and capital structure restructuring, which is driving strong free cash flow, rapid deleveraging and attractive new opportunities like a leadership position (>50% market share) in Near Field Communications, a fast emerging mobile payment technology being adopted by Google Android, Nokia and Blackberry.

Despite a strong recent run in the shares, limited familiarity and misconceptions leave it trading at a 50% discount to peer P/E and FCF multiples and lagging the performance of other comparably levered, post]LBO IPOs such as Sensata and Avago. As NXP's growth, profitability and cash flow attributes (it will generate close to $3 in 2011 FCF) become better understood, we see substantial upside in the name."

Since Dec. 9, NXP returned an additional 42%, whereas Sensata ( ST) returned 10% and Avago ( AVGO) returned 12%. Outsiders monkeying Dan Loeb's strong endorsement would have beaten the benchmark securities and the market by more than 30 percentage points.

One shouldn't think that Dan Loeb is doing a public service by endorsing these stocks. At the end of November, NXPI's market price was $12.58 with an average daily transaction volume of 220,000 shares during the previous 20 trading days. The stock price climbed to $18.44 by Dec. 8, with an average trading volume of 728,000 shares during the first six trading days of December. You don't need to be a genius to predict who was buying those shares days before Dan Loeb's letter to his investors.

Potash returned 17.7% in January. This is one of hedge funds' favorite investments. Mohnish Pabrai also has Potash in his portfolio.

In January, Smurfit-Stone Container Store announced that it will be acquired by Rock Tenn ( RKT) for $35 a share. The stock gained 46% in January. David Tepper and Barry Rosenstein were other SSCC investors.

In January Alpha Natural Resources ( ANR) also agreed to buy Massey Energy for a 21% premium. MEE returned 17% in January, contributing to Loeb's outstanding performance. Some of Alpha Natural Resources insiders were selling weeks before the announcement.

Gold is the largest position in Loeb's portfolio. GLD lost 6.4% in January. There are several hedge funds that invested in gold and suffered from the decline in gold. The decline in African Barrick Gold, which trades in London, reached almost 18% in January. Mead Johnson Nutrition's decline reached 7% in January, underperforming the SPY's 2.4% increase. Finally Accuride lost nearly 6% in January.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

A dispute with Apple and trends in China's smart phone market are weighing down Qualcomm's expectations for the second quarter. The timing could be better, as Broadcom is waging a hostile takeover offer and Elliott Management contests Qualcomm's bid for NXP.